Chinese Govt Says Financial System Must Support Economy

China’s Cabinet said the nation’s financial system must better support economic growth and restructuring, after a surge in credit failed to ignite growth and interbank borrowing costs jumped to the highest since 2006.

Authorities will boost credit support for industries the government has defined as strategic and those that are labor-intensive, the State Council said in Beijing yesterday after a meeting led by Premier Li Keqiang. The nation must also more firmly guard against financial risks, it said.

The seven-day repurchase rate, a gauge of interbank funding availability, rose to the highest since at least 2006 today as slowing economic growth, a crackdown on illegal capital inflows and efforts to rein in shadow banking contributed to increased borrowing costs. China’s central bank has refrained from using reverse-repurchase agreements to inject funds into the interbank market since Feb. 7.

The State Council “dashed hopes for any immediate rescue efforts by the central bank to ease the credit crunch,” such as reserve-ratio or interest-rate cuts, Tang Jianwei, a Shanghai-based economist at Bank of Communications Co., said by telephone today. “Between stabilizing economic growth and adjusting the growth model, China’s top policy makers have clearly made the decision to focus on the latter.”

The State Council meeting yesterday discussed how the financial industry can support a restructuring of China’s economy, according to the statement. Chinese leaders have sought to reduce the nation’s reliance on investment and exports for economic growth and to increase the role of domestic consumption.

More Forceful

The financial system must “support economic transformation and upgrading in a more forceful way, serve real economic development in a better way, promote domestic demand in a more targeted way and prevent financial risks in a more concrete way,” the State Council said.

China must push forward interest-rate liberalization, encourage corporate overseas investment, boost bond issuance and support those seeking to buy their first homes, according to the statement. Bank lending for projects in industries with overcapacity must be banned, the State Council said.

“Beijing’s new approach is to focus on reform, rather than stimulus,” said Qu Hongbin, HSBC Holdings Plc’s Hong Kong-based chief China economist, who cut his estimate for expansion this year to 7.4 percent from 8.2 percent. “In the last three months, we have seen enough evidence that the current generation of leadership is really determined to push forward reform.”

Prudent Policy

China must also uphold prudent monetary policy and “use it well,” and keep a reasonable scale of monetary aggregates, the State Council said.

The government’s broadest measure of credit rose 58 percent to a record 6.16 trillion yuan ($1 trillion) in the first quarter, when gross domestic product gained 7.7 percent, compared with 8.1 percent a year earlier.

Central bank Governor Zhou Xiaochuan said in April that the nation needs to “sacrifice short-term growth” to make reforms in the economy.

Chinese industrial production rose a less-than-forecast 9.2 percent from a year earlier and factory-gate prices fell for a 15th month in May, while export gains were at a 10-month low and imports dropped. First-quarter economic growth slowed to 7.7 percent from 7.9 percent in the last three months of 2012.

Investment banks from Morgan Stanley to UBS AG this month cut their estimates for China’s growth in 2013, and Barclays Plc is estimating that expansion will slow to 7.4 percent, below the government’s full-year target of 7.5 percent.

— With assistance by Xin Zhou

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